Rising Prices and Anxiety Cause Surprise Drop in Us Retail Sales

American consumers are steering clear of shopping centers, as home repossessions and surging household bills hit them in the wallet, according to dismal high-street spending figures that sent the dollar and Wall Street stocks tumbling yesterday.

As the treasury secretary, Henry Paulson, attacked banks for creating obscure financial instruments that exacerbate market turmoil, analysts reacted gloomily to a 0.6% drop in February retail sales - far worse than the widely forecast 0.2% rise.

Mark Vitner, senior economist at the US bank Wachovia, said soaring oil and food prices were leaving shoppers with little spending money. "High gasoline prices have pushed consumers to breaking point," he said, adding that a recession had become undeniable.

"Once the economy slides into recession, my experience from history is that things tend to get worse faster than anybody's expecting," he said.

Scores of major shopping chains, including Wal-Mart, Nordstrom and Abercrombie & Fitch, have reported disappointing takings so far this year. Even luxury boutiques such as Tiffany are suffering from the downturn.

Dean Maki, chief US economist at Barclays Capital, said: "We're seeing softer spending in the first quarter. Inflation is rising significantly, especially for oil and food. On top of that, the softer labor market is holding back income growth."

Pessimism is taking root in boardrooms: a Duke University survey of 475 chief financial officers found the worst level of sentiment in the study's six-year history: 54% believe the US is already in recession and a further 24% think there is a high risk of one shortly.

The Wall Street Journal's economic forecasting survey showed 71% of respondents putting the US in recession, and 48% of the 55 responses said a 2008 recession would be worse than the last two.

The Bush administration has set out reform proposals which are intended to tackle the credit meltdown through better regulation of mortgage companies, tightening credit-rating procedures, and higher capital ratios for the banking sector.

In a speech to the National Press Club in Washington, Paulson accused financiers of devoting too much energy to inventing esoteric securities that leverage mortgages and other debt, making it impossible to find where ultimate risks lie.

"Some financial products have become overly complex," he said. "Excessive complexity is the enemy of transparency and market efficiency. Investor sentiment has swung hard to risk-aversion, and now the markets are punishing not only complex but non-complex products as well."

A working group set up by George Bush has proposed strengthening Basle II - the international agreement setting minimum capital requirements for banks. The group also recommends cracking down on firms that "shop around" among rating agencies for lenient treatment.

"Market participants' behavior must change," Paulson said. Although he was not interested in finding excuses and scapegoats, he said the financial sector's turmoil was partly self-inflicted: "Poor judgment and poor market practices led to mistakes by all participants."

Homeowners in the US heartland are still struggling to make repayments on risky subprime mortgages, which sparked the downturn last year. The property firm RealtyTrac calculated that foreclosure papers were filed on 223,651 properties in February - one in 557 households.

The figure was slightly lower than in January but Realty Trac's chief executive, James Saccacio, said the dip was seasonal: "We have still not reached the peak of foreclosure activity in this cycle."

The worst-hit areas include Cape Coral, Florida and Stockton, California. Arizona and Texas also saw a big increase in their rates of repossession. Among those served with foreclosure documents was the singer Aretha Franklin, who is at risk of losing her $700,000 (£350,000) mansion in Detroit over back taxes of $19,192.

Less dough

Even America's pizzas are set to shrink as the nation grapples with a toxic recipe of weak consumer spending and surging prices.

The delivery chain Domino's Pizza is drawing up plans for a "value menu" likely to involve smaller sizes. The move is in response to customers' thrifty mood, as well as pressure from rising wheat costs.

"We're going to try to take an approach where you still see the same product quality," said chief executive Dave Brandon. "But perhaps a different size and perhaps a different bundle so you won't disappoint the customer."

Reflecting America's tradition for enormous helpings, Domino's Pizza sizes are half an inch larger in its home market than in Britain. Michigan-based Domino's has already laid off 50 staff in response to America's economic slowdown.